LEE SOW KENG JANET v. KELLY MCKENZIE LTD AND OTHERS

DCCJ 2303/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2303 OF 2002

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JUDGMENT

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1. The Plaintiff was an employee of an employment consultant agency known as Kelly McKenzie (hereinafter called "Kelly McKenzie"), the trading name of a limited company called Linkwaters Investment Ltd. (hereinafter called "Linkwaters"). She was employed and worked as a personnel consultant from February 1989 to 24 December 1997. The terms of her employment are set out in the February 1989 agreement signed by the 2nd Defendant on behalf of Kelly McKenzie as the employer and the Plaintiff as the employee (hereinafter called "the employment contract").

2. On 27 October 1997, the Plaintiff resigned from Kelly McKenzie by a letter of the same date giving two months' notice under the terms of the employment contract. It is undisputed that on 12 December 1997 during the time the Plaintiff was serving her two months' notice, she was summarily dismissed by Kelly McKenzie.

3. The Plaintiff started proceedings in the High Court under HCA 11828 of 1998 for commission owed to her by Kelly McKenzie (Linkwaters) and obtained judgment in default against Linkwaters for $100,000.00 on 30 November 2000 and a further judgment for $303,825.00 on 18 January 2001. Unfortunately, the judgments were not satisfied and the Plaintiff petitioned for the winding up of Linkwaters Investment Ltd. on 12 February 2001. She obtained an order of winding up on 25 April 2001 in HCCW No. 147 of 2001.

4. Subsequent to the said winding up proceedings, the Plaintiff discovered the 1st Defendant was incorporated on 28 November 2000 by the 2nd and 3rd Defendants who were also the directors and shareholders of Linkwaters. Sometime in 1998 the 2nd Defendant transferred her share in Linkwaters to the 4th Defendant who had also become a director of Linkwaters in 1998.

5. The Plaintiff claims that there were unfair dealings between Kelly McKenzie (Linkwaters) and Kelly McKenzie Limited (1st Defendant) in the two years prior to the winding up of Kelly McKenzie (Linkwaters). She further alleged that the 1st Defendant is a sham and a façade established by the 2nd, 3rd and 4th Defendants to avoid payment of the commission and other emoluments owed to her by Kelly McKenzie.

6. The Plaintiff claims that four Defendants are liable to her for the payment of the judgment debt in HCA No. 11828 of 1998.

7. In their defence, the Defendants denied the incorporation of the 1st Defendant was related to the Plaintiff. It claims that the 1st Defendant was incorporated to preserve the good will and reputation of Kelly McKenzie when a former employee resigned on 8 October 1997 who threatened to establish an employment recruitment business in competition with Linkwaters. The Defendants denied any unfair trading or sham alleged by the Plaintiff. They further claim that the Plaintiff has failed to particularise the grounds of her claim of unfair trading and sham.

8. The Plaintiff gave evidence at the hearing and confirmed the evidence in her witness statement of 31 December 2002. The Defendants called no evidence in rebuttal.

The issue

9. The issue in these proceedings is mainly whether the Court should lift the corporate veil and find the 1st Defendant liable and its directors and the former directors of Linkwaters liable personally for the judgment debt in HCA 11828 of 1998.

The Law

10. According to Palmer's Company Law Vol. 1 paragraph 2.1519 - 2.1520 in respect of lifting the corporate veil :

"Looking behind the company's legal persona. Lifting the veil

It may be convenient to list briefly the main instances in which modern company law disregards the principle that the company is an independent legal entity. Generally speaking, the courts are more inclined, in appropriate circumstances, to "lift the veil" of corporateness where questions of control are in issue than where a question of ownership arises. In practice, the ability to choose between the application of the rule in Salomon 's case and the jurisdiction to pierce the veil of corporateness gives the courts a considerable degree of discretion and enables them to do justice and to decide individual cases in accordance with equitable considerations. But it should be emphasised that the rule in Salomon 's case is still the principle and the instances of piercing the veil are the exceptions, though their number is growing.

The corporate veil is lifted in the following cases :

1. Where companies are the relationship of holding and subsidiary (or sub-subsidiary) companies, the Act requires, in principle, group accounts.

8. The courts have further shown themselves willing to "lift the veil" where the device of incorporation is a façade or sham and no unconnected third party is involved. So, where a transport company sought to obtain licences for its vehicles, which it was unlikely to obtain if it made application on its own behalf, by causing the application to be made by a subsidiary company to which the vehicles were to be transferred, the court refused to treat parent and subsidiary as independent bodies, and decided the application on the basis that they were one commercial unit. Similarly, where a vendor of land sought to avoid an action for specific performance by transferring the land in breach of contract to a company he had formed for the purpose, the court treated the company as a mere "sham" and made an order for specific performance against both the vendor and the company. Where a bankrupt obtained credit for himself through the "charade" of a company, he committed an offence under what is now section 360(1)(a) of the Insolvency Act 1986, although normally the offence is not committed if the credit is obtained for another person. However, the court does not have the power at common law to remove the corporate veil simply because the company was involved in some impropriety not linked to the use of the corporate structure or because the interests of justice so require."

11. Yam J. In the recent case of Liu Hon Ying trading as United Speedoc Company v. Hua Xin State Enterprise (Hong Kong) Limited and Anor. (HCA 1060 of 2001) (judgment handed down on 19 June 2003) found on the facts that :-

"78. Hua Xin was incorporated and commenced business in November 1996, after the debt was incurred and owed by Hung Tak to the plaintiff and at the time when the plaintiff started claiming against Hung Tak for the debt. The uncontradicted evidence of Chan Chi Yung shows that the common controller behind the two companies gradually channelled Hung Tak's business and assets to Hua Xin."

He further held in paragraph 79-80 at page 29-30 of his judgment that :

"Since Hung Tak and Hua Xin was under the same common controller behind, the only reasonable inference is that the common controller had already decided to give up Hung Tak and the business was therefore diverted to Hua Xin.

80. In the premises, I accept the plaintiffs' submission that this is a classical case where Hua Xin's corporate veil should be lifted so that Hua Xin is to be treated in law as the same entity as Hung Tak. The legal test in this area is whether the company was used as a device to conceal true facts and thereby devoid or evade liability. The present situation falls squarely within the situation anticipated by law to lift the corporate veil. It has been said that :

'Using a corporate structure to evade legal obligations is objectionable. The courts' power to lift the corporate veil may be exercised to overcome such evasion so as to preserve legal obligations. But using a corporate structure to avoid the incurring of any legal obligation in the first place is not objectionable. And the courts' power to lift the corporate veil does not exist for the purpose of reversing such avoidance so as to create legal obligations.'

Per Bokhary JA (as he then was) in China Ocean Shipping Co. v. Mitrans Shipping Co. Ltd [1995] 3 HKC 123, at 127."

Further, in paragraph 82 of Yam J.'s judgment he referred to an English authority and applied it to the facts of the case :

"82. Further, it was held in Trustor AB v. Smallbone and others (No. 2) [2001] 1 WLR 1177 (per Sir Andrew Morritt VC) that :

"... the court was entitled to pierce the corporate veil and recognise the receipt of a company as that of the individual or individuals in control of it if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liability of that individual or those individuals; ..."

83. By reasons of my findings of facts hereinbefore, I consider that the present case falls squarely within the situation anticipated by the law to lift the corporate veil. Hua Xin was not incorporated to avoid liability (which in any event, is not the case put forward by Hua Xin) but to evade the liability of Hung Tak to the plaintiff. Therefore, Hua Xin should be made liable for Hung Tak vis-à-vis the plaintiff irrespective of the application of the Transfer of Business Ordinance in any event."

12. Mr. Finley, on behalf of the Plaintiff, relies on the English case of Creasy v. Beachwood Motors Ltd. & ors. [1993] BCLC 480, where Richard Southwell QC said at page 491 D-E :

"The power of the court to lift the corporate veil exists. The problem for a judge of first instance is to decide whether the particular case before the court is one in which that power should be exercised, recognizing that this is a strong power which can be exercised to achieve justice where its exercise is necessary for that purpose, but which, misused, would be likely to cause not inconsiderable injustice. The authorities which are collected in Gore-Browne and also in Gower's Principles of Modern Company Law (5th Ed, 1992) provide only limited guidance as to the circumstances in which this power is to be exercised."

13. Mr. Tajima, on behalf of the Defendants, submitted that the U.K. Court of Appeal has expressly overruled Creasey in the case of Ord v. Belhaven Pubs Ltd. [1998] 2 BCLC 447. Further, he submitted that the Hong Kong Court of Appeal in the case of China Ocean Shipping Co. v. Mitrans Shipping Co. Ltd. [1995] 3 HKC 123 has also declined to follow Creasey although in the earlier Court of Appeal case of HKSAR v. Leung Yat Ming and Anor. [1999] 2 HKLRD 402 it had applied the test in Creasey and held "where the justice of the case requires it, it is permissible to go behind the veil, particularly where, as in the present case, it is a cloak for deception."

14. The passage Mr. Tajima referred to can be found in the judgment of Nazareth V.P. in the China Ocean Shipping case where he said at page 128 B-F:

"Plainly, if the criteria by which the power to lift the corporate veil arises is simply that it will achieve justice and its exercise is necessary for that purpose, as Mr Kat suggests, then a quantum widening of what the Court of Appeal held in Adams v Cape Industries plc [1990] 1 Ch 443 at 544 would be involved. But I do not read Mr Southwell as saying anything more than that in deciding whether the power should be exercised, the court should recognize that it is one that can be exercised to achieve justice where its exercise is necessary for that purpose but which, if misused, will be likely to cause not inconsiderable injustice. He was not seeking to remove altogether the very narrow confines within which the courts have placed the power to lift the corporate veil. Reference to Gore-Browne and Gower's Principles of Modern Company Law (5th Ed) demonstrate that. Indeed, the latter states at p 133: 'The court cannot lift the veil merely because it considers that justice so requires', adding in reference to that statement, in the relevant footnote: 'See Cape [1990] 1 Ch 443 at 537. English judges (apart from Lord Denning) have shown a marked reluctance to operate any such formula ...'. That footnote must refer to the following passage in Adams v Cape Industries plc:

Neither in this class of case nor in any other class of case is it open to this court to disregard the principle of Salomon v A Salomon & Co Ltd [1897] AC 22 merely because it considers it just so to do."

15. On the other hand, Mr. Finley submitted that the Court of Appeal in the case of China Ocean Shipping did not overturn Creasey, it had only narrowed down the gate opened by Creasey.

Findings

16. I find, in the present case, similarities can be found in the recent case of Liu Hon Ying trading as United Speedoc Company v. Hua Xin State Enterprises (Hong Kong) Ltd. & Anor. (HCA 1060 of 2001). In the present case, the 2nd and 3rd Defendants incorporated the 1st Defendant 4 weeks after the Plaintiff handed in her notice of resignation; it was 14 days before the Plaintiff's dismissal by Kelly McKenzie. Furthermore, the 2nd and 3rd Defendants were the only directors and subscribers of both Linkwaters and the 1st Defendant until the 2nd Defendant's resignation on 29 April 1998. Her share in Linkwaters was transferred to the 4th Defendant on 13 July 1998. The 4th Defendant was at the times an employee of Kelly McKenzie. The 2nd and 3rd Defendants remained the only directors of the 1st Defendant until 5 March 2001 when she retired and transferred her share to one Lui Lap Shing on 19 March 2001. Lui was said to be a relative of the 1st and 2nd Defendants. It is not disputed that the 1st Defendant took over the business of Linkwaters, including the purchases of its office equipment. There was obviously no loss of goodwill because Linkwaters had always traded in the name of Kelly McKenzie since 1989.

17. In the case of Liu Hon Ying, Yam J. found that "Hung Tak and Hua Xin was under the same common controller behind, the only reasonable inference is that the common controller had already decided to give up Hung Tak and the business was therefore diverted to Hua Xin." It is obvious that in the present case, both Linkwaters the 1st Defendant were both controlled by the 2nd and 3rd Defendants.

18. No matter what was the reason behind the 2nd and 3rd Defendants' incorporation of the 1st Defendant one month after the Plaintiff gave notice, whether it was in anticipation of competition from a former employee or in anticipation of the payment of commission demanded by the Plaintiff, the diversion of the goodwill and business of Linkwaters/Kelly McKenzie into the 1st Defendant must have been effortless for the 2nd and 3rd Defendants. This has the effect of rendering Linkwaters without the funds to pay the judgment debt; the 2nd and 3rd Defendants who controlled both companies clearly had no intention to honour the payment. Furthermore, similar to the Liu Hong Ying case, Linkwaters chose not to defend the earlier proceedings in HCA 11828 of 1998 and allowed it to be wound up. The evidence of the Statement of Affairs on 25 April 2001 filed on behalf of Linkwaters bears this out. Under of the Statement of Affairs List G 'unsecured creditors and other liabilities', the 2nd and 3rd Defendants claimed for dividends due, while Linkwaters' former solicitors Messrs. Gallant Ho & Co. for legal fees owed and the 1st Defendant for payment made on Linkwaters' behalf. It is obvious, if the 1st Defendant had not been incorporated, the 2nd and 3rd Defendants would have settled these debts.

19. The facts in the present case showed the conduct of the 2nd and 3rd Defendants to be even more reprehensible than the case of Liu Hon Ying. The action of the 2nd and 3rd Defendants was so blatant in their transfer of business and assets to the 1st Defendant that I cannot find a more appropriate case to lift the corporate veil following the test applied in the authorities of China Ocean Shipping, Leung Yat Ming, Creasey and Liu Hon Ying.

20. The 2nd and 3rd Defendants are sisters; it is also the evidence of the Plaintiff that the 2nd Defendant ran both Linkwaters and the 1st Defendant while the 3rd Defendant worked part time at Linkwaters. The 4th Defendant was an employee of Linkwaters and the 1st Defendant until 2001 when he resigned from the 1st Defendant. Though he was made one of the two directors and shareholders of Linkwaters up to the time of its winding up, clearly, he was so involved only after 13 July 1998, i.e. seven months after the debt to the Plaintiff had been incurred. He was made a director of Linkwaters just as the Plaintiff was once made one of its directors, while the 2nd Defendant was the only person managing the business from day to day while the 3rd Defendant would handle the company accounts working two days a week. The 2nd Defendant's total control of Kelly McKenzie can be glimpsed from the correspondence she had with the Plaintiff in the months of October to December 1997.

21. I am further informed that the 1st Defendant has ceased trading in February 2001 after the 4th Defendant resigned from the 1st Defendant. It is not known if the 1st Defendant has any assets at this point of time. In any event, it is clear to me the 2nd and 3rd Defendants were the controllers behind Linkwaters/Kelly McKenzie and the 1st Defendant, both being vehicles used by them to run their employment agency business.

22. In the circumstances and on the facts before me, I have no hesitation to find that the 1st Defendant as a vehicle of the 2nd and 3rd Defendant, should be jointly and severally liable with the 2nd and 3rd Defendant who are both personally liable to the Plaintiff for the judgment debt for emoluments and commission earned by the Plaintiff while she was an employee of Kelly McKenzie. For reasons set out above, I find the 4th Defendant should not be liable to the Plaintiff.

23. I award to the Plaintiff her claim for $403,825.50 with interests and costs of High Court Action No. 11828 of 1998 at judgment rate from date of writ until full payment.

24. Cost nisi - Costs follow the event. The 1st to 3rd Defendants do pay the costs of the Plaintiff to be taxed if not agreed. As between the Plaintiff and the 4th Defendant, there shall be no orders as to costs.